If you’ve ever worked with a lender or creditor, you may not have known it at the time, but you were being protected by the Truth in Lending Act. The TILA is a federal law that’s been on the books for more than 50 years and is continually amended to ensure today’s consumers can safely compare loans and credit cards.
What is the Truth in Lending Act?
As Credit Karma contributor Sarah Brady notes, the passage of the Truth in Lending Act (TILA) was the result of consumers not being empowered to make the most informed financial decisions possible. Prior to the TILA’s enactment in 1968, it was not unusual for deceptive lenders and creditors to try and overwhelm borrowers in an effort to trick them into an unfair agreement.
TILA put an end to that and put the power into the hands of consumers. According to the Office of the Comptroller of the Currency, the objective of the Truth in Lending Act is to mandate that lenders provide accurate and more easily digestible information on loans and lines of credit. This gives consumers what they need to compare rates and make the smartest decision possible.
The scope of the TILA has continued to evolve over the course of 55 years and will likely continue to do so. The Federal Trade Commission notes amendments over the years include anti-steering stipulations, which prevent mortgage originators from steering consumers into riskier and higher-cost loans.
What does the TILA do?
Will Kenton, a contributor with Investopedia, explains the Truth in Lending Act requires the disclosure of key information to consumers. This includes, but isn't limited to, the annual percentage rate, life of the loan, and the total costs a consumer can expect to incur. It also requires certain disclosures are made in advertising. With this information, consumers will have an accurate and fair view of what they’re signing up for.
The TILA also prevents lenders from making unfair changes to credit agreements without providing due notice. The act requires creditors to give cardholders 45 days’ notice before increasing fees, for example. And the TILA protects against creditors making unreasonable demands, which Brady notes can include being asked to pay off a loan in full any time prior to its stated end date.
Kenton points out the TILA extends to a wide range of loans and lines of credit, including open- and closed-end credit lines. That means your car loan, mortgage, and credit cards are all covered under the scope of the Truth in Lending Act. Exceptions not covered by the TILA include business lines of credit and some student loan programs.
The Truth in Lending Act may not be one of the better-known federal laws on the books, but it’s one of the most critical for protecting consumers. Thanks to the TILA, you can safely and reliably shop for a mortgage, auto loan, or credit card without fear of being locked into an unfair deal.